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The 9 best dividend growth stocks in the Dow

At a glance

Company

Ticker

American Express

AXP

Apple

AAPL

Boeing

BA

Cisco

CSCO

Goldman Sachs

GS

Home Depot

HD

JPMorgan Chase

JPM

Nike

NKE

Visa

V

All company data from Kiplinger

The Dow Jones Industrial Average (.DJI) has been around since the late 19th century and consists of 30 of the largest publicly traded companies in America. Most of these companies are proven leaders in their industries, and all of them are dividend stocks, with yields ranging from 0.7% to 4.6%.

However, not all these dividend-paying Dow stocks are equal.

Some of these companies are bound to run into hard times that can jeopardize the safety of their payouts, such as General Electric (GE) in 2017. Others are contending with dynamic competitive environments that could impair their long-term outlooks for earnings growth and meaningful dividend increases.

The nine dividend growth stocks in the Dow Jones featured today offer some of the best potential for long-term growth and maintain very healthy Dividend Safety Scores – a metric calculated by Simply Safe Dividends to evaluate how likely a company is to cut its divided in the future. In other words, the best days still seem to be ahead of these blue-chip businesses, providing dividend growth investors with the potential to capture higher payouts and capital gains as these companies grow in value over the coming years.

Data is as of Jan. 12, 2017. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Companies are listed alphabetically. Click on ticker-symbol links in each slide for current share prices and more.

Big-cap pharma stocks for income

With a reputation for generating cash, these companies can be worth a look.

American Express

American Express has been in business since 1850, boasting a long track record of success that caught the eye of Warren Buffett when he bought 5% of the company back in the mid-1960s.

American Express accounts for close to 8% of Berkshire Hathaway's (BRK/B) portfolio today, and the provider of credit card and travel-related services continues to enjoy a solid moat.

In fact, Morningstar Senior Equity Analyst Jim Sinegal wrote, "American Express' competitive advantages – a reputation for superior service, a network of attractive customers and merchants, and a corporate business with high switching costs – remain intact for now, and we think the closed-loop network's close ties to cardholders and merchants provide a solid base for the next phase in the company's history."

American Express focuses on cardholders who spend more than others on average, which has allowed the company to enjoy better discount rates with merchants while offering more rewards to its cardholders, creating something of a network effect.

Competition is steep in the fast-changing payments industry, but that shouldn't prevent AXP from continuing to grow its dividend, which has increased for six consecutive years. Management last hiked American Express' payout by 9.4% in 2017, and the company's sub-30% payout ratio should provide plenty of room for higher dividends in the years ahead.

Apple

Ticker symbol:AAPL

Dividend yield: 1.5%

Consecutive annual dividend raises: 5

As the world's most valuable brand and one of the largest holdings in Warren Buffett's dividend portfolio, Apple needs no introduction.

The company generates the bulk of its business from iPhones (62% of fiscal 2017 sales), but Macs (11%) and iPads (8%) are important to the business as well, and Services (13%) is becoming a growing chunk of the pie.

Apple's business has thrived over the last decade thanks to its brand power, superior product innovation, unique ecosystem of hardware and software, and favorable terms with suppliers as a result of its sheer scale.

With cash building up faster than Apple could reinvest it, the company decided to begin paying dividends again in 2012. Management has since raised Apple's quarterly payout from approximately 37.86 cents per share to 63 cents, recording cumulative growth of more than 60% during this period.

With five consecutive annual dividend increases under its belt already, Apple should have no trouble continuing its streak in the future thanks to its stellar financial health. The company's payout ratio remains very healthy below 30%, over $200 billion in cash and marketable securities sits on the balance sheet, and Argus analyst Jim Kelleher maintains a long-term EPS growth rate forecast of 13%.

Stocks with years of dividend growth

Boeing

As the largest aerospace company in the world, Boeing's commercial jetliners and defense, space and security systems reach customers in 150 countries.

Boeing's long-term outlook for both cash flow and dividend growth is bright for several reasons, starting with the firm's numerous competitive advantages that protect its industry-leading position.

Specifically, the large commercial aircraft market has been a duopoly, with Airbus (EADSY) sharing the market. Developing, manufacturing and delivering a new commercial airplane are extremely costly and time-consuming activates. Moreover, competing in this industry also requires stringent compliance with numerous regulations, and airline customers prefer to work with a proven operator who can reliably service their planes over their useful lives.

Boeing expects 4.7% average annual passenger traffic growth over the next 20 years to drive 3.3% annual fleet growth. To support this, more than 41,000 new airplane deliveries are expected to be needed, valued at more than $6 trillion.

As a result, Morningstar senior equity analyst Chris Higgins expects Boeing's operating cash flows to "increase steadily from our forecast of $13 billion in 2017 to a peak of $15.5 billion in 2020."

Rising cash flow fuels dividend growth, an area where Boeing has certainly delivered in recent years. The company last raised its dividend by 20% in late 2017, capping off its sixth straight year of higher payouts. Boeing's dividend growth streak isn't long, but the company has made uninterrupted payouts for more than 20 years – an appealing trait for conservative investors living off dividends in retirement.

Cisco

Ticker symbol:CSCO

Dividend yield: 2.9%

Consecutive annual dividend raises: 6

Since its founding in 1984, Cisco Systems has been bes- known for providing infrastructure that helps power the internet by connecting computing devices and networks. From switches and routers to collaboration tools, security software, and technical support, Cisco's hardware and services encompass an entire suite of solutions it can offer to customers.

When combined with the company's massive installed base and efforts to continuously stay relevant with a team of more than 20,000 engineers and $6 billion spent annually on research and development activities, it's no wonder why Cisco has enjoyed success for more than 30 years.

However, Cisco is a business on the move. Specifically, the company has been working hard to transition its business mix to more software and subscription-based revenue in recent years under the leadership of CEO Chuck Robbins.

The rise of cloud computing, coupled with intense competition in some of the company's legacy hardware markets, has increased some of the urgency behind this push. However, investors have reason to feel encouraged. Cisco's recurring revenue increased three points year-over-year last quarter to reach 32% of total sales, and the top line returned to growth in each of the company's three geographical regions.

Thanks to its modest payout ratio, cash hoard and growing momentum, Cisco's dividend has grown by 14% annually over the company's past five fiscal years and should have more room to run.

Growth stocks for rising rates

There are a number of yield-bearing stocks to watch as interest rates rise.

Goldman Sachs

Ticker symbol:GS

Dividend yield: 1.2%

Consecutive annual dividend raises: 6

Known for being one of the most prestigious banks on Wall Street, Goldman Sachs generates its revenue from a diversified mix of activities, including investment banking (21% of year-to-date 2017 revenue), investing & lending (20%), investment management (19%), and a variety of institutional client services, such as fixed income trading.

As regulatory pressure on bank stocks intensified following the financial crisis, Goldman Sachs has shifted more of its business into fee-based or more recurring revenue sources, such as investment management and banking. These actions have added diversification to the company's revenue while providing greater stability.

Morningstar analyst Michael Wong commented, "The company's investment management business has become a priority in the past several years. Assets under supervision now exceed $1.3 trillion, while related investment management revenue has recently clocked in at around 20% of net revenue compared with 11%-12% before 2008. Investment management is a relatively stable, high-return-on-capital business that is well suited to the current regulatory environment."

As a result, Goldman Sachs has been able to shower shareholders with generous dividend growth in recent years. Management raised the company's payout by 15.4% in 2017 and has paid uninterrupted dividends for more than 15 years, boosting its distribution each year since 2012.

Home Depot

Ticker symbol:HD

Dividend yield: 1.9%

Consecutive annual dividend raises: 8

Home Depot was founded in 1978 and has grown to become the largest home improvement retailer in the world with more than 2,200 stores across North America.

A typical Home Depot store averages more than 100,000 square feet of retail space and is connected to the company's e-commerce business to offer more than a million products for contractors and consumers alike.

Home Depot sees a $600 billion market opportunity in the U.S., so despite its size, HD should have ample opportunity for growth considering the company's sub-$100 billion revenue base. In fact, management expects sales to achieve a compound annual growth rate between 4.5% and 6% through fiscal 2020, with improving profitability along the way.

That should help Home Depot continue its impressive streak of paying uninterrupted dividends since 1987. Even better, the company has rewarded shareholders with some of the fastest dividend growth in the market, increasing its payout by more than 20% annually over the past five years.

Focus on investing

JPMorgan Chase

Ticker symbol:JPM

Dividend yield: 2.0%

Consecutive annual dividend raises: 7

JPMorgan Chase is one of the largest banking companies in the world with more than $2.5 trillion in assets. The company's financial services span everything from investment banking and asset management to consumer lending and financial transaction processing.

Thanks to its size, disciplined management led by CEO Jamie Dimon, and massive base of low-cost deposits, JPMorgan enjoys several major advantages. According to Morningstar's Sinegal, "The cost advantages stemming from scale are evident in the company's results. The firm's diversified business model stabilizes results, increases customer switching costs, and allows the company to generate more revenue per dollar of assets than smaller peers."

While it's true that JPMorgan was forced to cuts its dividend during the financial crisis, the bank is fundamentally much safer now. Specifically, new regulations forced banks to reduce leverage and hold less risky capital.

Fortunately, the firm's dividend has already surpassed its pre-crisis high, and management lifted the payout by another 12% in 2017. Between the corporate tax cuts and expectations for higher interest rates in 2018 and beyond, investors have plenty to be optimistic about with bank stocks, including JPM.

Nike

Ticker symbol:NKE

Dividend yield: 1.3%

Consecutive annual dividend raises: 15

Nike designs and markets a wide variety of footwear, sports apparel, equipment and accessories. As the largest global seller of athletic footwear and apparel with one of the most valuable brands in the world, Nike enjoys solid pricing power and economies of scale. As a result, the company has achieved a stellar return on invested capital north of 30% that allows it to quickly compound its earnings and dividend over time as the business expands.

That said, the performance apparel market is extremely competitive – featuring rivals such as Adidas (ADDYY) and Under Armour (UAA) – and consumer buying habits are changing to favor more online shopping. Nike is adapting by building out its own direct-to-consumer business, including a new partnership with Amazon.com (AMZN) in 2017, and further expanding its reach in international markets, which already account for about half of company-wide revenue.

Overall, Nike seems likely to remain a strong force in the footwear and performance apparel markets for many years to come, and the same is true for its dividend, which has been paid without interruption for more than 20 years.

Management last hiked the payout by 11% in late 2017, and double-digit improvements seem possible over the next few years. In fact, Argus analyst John Staszak expects Nike's earnings to grow 12% in fiscal 2019.

Visa

Ticker symbol:V

Dividend yield: 0.7%

Consecutive annual dividend raises: 9

Visa's electronic payments network enables consumers and businesses to make payments around the world. The company boasts 3.2 billion credit and debit cards in circulation and provides processing services to handle the authorization, clearing and settlement of transactions.

As more payments are made electronically each year rather than with cash, Visa should have opportunity to continue growing its business since it collects a fee whenever its cards are used. Warren Buffett is a believer in Visa's growth story, as his firm Berkshire Hathaway bought a stake in the company in 2011.

While Visa only began paying dividends in 2008, its payout growth has been exceptional. The company's dividend has compounded by 23% annually over Visa's past five fiscal years, and management last boosted the payout by 18% in late 2017.

Double-digit dividend growth should continue over the coming years. Argus analyst Stephen Biggar expects earnings per share growth of 16% and 13% in fiscal 2018 and 2019, respectively.

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